One truth that has proved most evident in regards to the world of digital options (binary options and forex) investing would be how most individuals are on the constant prowl for the “Holy Grail” of trading approaches. Admittedly I use to be one of those individuals as well but throughout the years I have learned that I only wasted precious time researching when I could have been developing and improving my probability of success on a more fundamental and micro level.
Perhaps one of the biggest mistakes made by online day-traders now-a-days would be that they are constantly on the lookout for a more macro investment approach or software when in all actuality they should be going back to their roots and sticking with a more micro and fundamental investment approach.
Throughout the duration of this enlightening investment article we won’t cover any particular trading concepts but rather four micro trading approaches that can and should be implemented while investing online with digital options. Now these investment approaches are based upon the principles of technical analysis so the only requirement on your behalf would be access to a reputable charting solution such as freestockcharts.com.
Now before we dig any deeper into these trading approaches it is imperative that we know the components and framework that allow these trading approaches to be possible. With that in mind we will be covering the basics of order flow, price action and Japanese candlesticks prior to implementing four common Japanese candlestick formations to our investment arsenal.
So what is order flow and price action? Order flow can be best described when a trader believes that the future direction of a given security or asset will head in a particular direction so they execute an investment based upon their prediction in the financial markets.
These executed investments create what is known as price action which is also known as the derivative of order flow. This makes sense because price action is the by-product of order flow (executed investments) and is the reflected price values of a particular asset or security. When you load your charting solution up and have an asset or security selected the price movements you see on the chart is known as price action.
So how exactly does order flow and price action fit in with Japanese Candlestick formations? Well Japanese candlestick formations is a plotting method used by the wide-majority of investors who would prefer a more beneficial and informative way to analyze the price action of an asset or security. So when an investor changes their plotting method to Japanese candlestick formations they are essentially just choosing a more legible and simplistic method of analyzing the markets thus resulting in the formation of candlesticks.
Now there are three probable candlestick formations that can result from the price action of any asset or security but only two are common. Among the three types of candlestick formations that can occur would be: bullish, bearish and neutral.
A bullish candle is a candlestick that is increasing in value therefore the body of the candlestick is moving in an upward direction. A bearish candlestick on the other hand is a candle that is decreasing in value and heading in a downward direction. The last type of candlestick that can appear is what is known as a neutral candle where the price of the asset or security is neither increasing or decreasing, it is just constant and never-moving.
As shown in the picture provided above it is important to remember that bullish candlesticks open at the bottom and close at the top of the candle body. This makes sense because when a bullish candle is present it means that the price of the asset or security is also increasing which is why this candle opens at the lowest price level and closes at the top of the candle at the highest price value. Essentially the opposite could be said in regards to a bearish candlestick which opens at the highest price value (at the top of the candle body) and closes at the bottom of the candle at the lowest price value. Remembering these simple fundamentals will greatly increase your understanding of technical analysis and candlestick formations so please do your best to remember them!
Now that you have a better understanding of the fundamentals of Japanese candlestick formations lets cover four common candlestick formations that can greatly improve the success rate of your investment portfolio. The first candlestick formation that we will be covering today is known as the Morning Star candlestick formation. The morning star formation is comprised of three candlesticks where there is a strong bearish candle followed by two consecutive bullish candles.
The first bullish candle is succession should be classified as a doji candlestick where it lacks much of a candle body as seen in the image below. Morning Star formations indicate to investors that a bullish reversal is likely to occur so they should place a buy order (call) with an expiry time that is relevantly near their set time frame. In the picture provided below you can see an investment example with this formation.
The second formation we will be covering is a common reversal candlestick formation known as the Inside Bar. The inside bar candlestick formation as you may have guessed is a candlestick formation that resides within the body and wicks of the previous candlestick. The entire body and wick of the inside bar candlestick should reside within the candle preceding it and it indicates to investors that a market reversal is likely to happen. So if you see a bearish inside bar formation occur where the candle before it is bullish you will be placing a CALL investment that is relevant to your time frame. On the other hand, if a bullish inside bar formation occur and the preceding candle is bearish then you will execute a PUT investment near your chosen time frame.
The third formation we will be covering which can be seen in the image provided above is known as the shooting star. One way to remember the Shooting Star formation would be that it resembles the mirror image of the hanging man formation (covered below) which visually appears as an upside-down mallet hammer.
Now just like the hanging man formation, the shooting star formation occurs after a strong bullish trend has been established and once created it indicates to investors that a bearish reversal is likely to occur. The “handle” of the hammer (long wick of the candle) should appear at the top of the candle whereas the body of the candle (hammer head) appears near the bottom of the candle. Once this formation has been created you can execute a PUT investment with an expiration time near your predetermined time frame.
The last candlestick formation that we will be discussing today is a popular candlestick formation known as the the Hanging Man formation. The hanging man candlestick formation is a common bearish reversal formation which resembles the visual characteristics of a mallet hammer. This formation should result after a strong bullish (upward) trend has been present and is characterized by a long wick at the bottom of the candle with a smaller body near the top of the candlestick. Once the formation has been created you can execute a PUT investment with an expiry time near your current time frame.
Perhaps one of the best advantages about the creation of Japanese candlestick formations would be that they can be utilized essentially on any time frame. So whether you are more of a turbo option type of investor or prefer the more traditional means of binary option investing that deals with 15 to 30 minute time frames just know using these 4 trading approaches can greatly increase your probability of success with online day-trading. Statistically and historically speaking it has been found that using these formations on a medium to longer-time frame such as 15 minutes, 30 minutes, 1 hour, 4 hour or end-of-day time frames yield the best success rates.
As always if you have any questions or feedback to share please feel free to leave a comment below. As many of you may have noticed we are a fairly active community here so the more feedback and shares we have the more everyone will benefit in the long-run from our vastly growing community!